ISGEC Heavy Engineering - On a strong footing despite macro headwinds - ICICI Securities

ISGEC Heavy Engineering's (ISGEC) management, in their concall, shared confidence on buoyancy in certain segments of domestic market like FGD, refinery, civil infra, petchem, fertilisers, hospitals and airports. Pace of execution continues to be slow, impacted by labour unavailability (currently at 75%). The impact on manufacturing margin in Q4FY20 was due to delay in dispatch of equipment and management sees sustainable margins in manufacturing segment at 9% and EPC segment at 5%. The directors' remuneration will be cut by 75% and a 5-30% cut in the salary of white collar employees (> Rs800,000 per annum salary) is expected to reduce overall staff costs by ~15% for FY21. Current orderbook at Rs69bn (1.4x TTM sales) provides growth visibility. We factor-in 8% standalone earnings growth over FY20-FY22E and maintain BUY rating on the stock with an unchanged SoTP based target price of Rs330.

- Healthy orderbook provides growth visibility: Despite challenging environment, ISGEC's current orderbook at Rs69bn (1.4x TTM sales) lends growth visibility. The orderbook constitutes Rs54bn of EPC orders and Rs15bn of orders from products business. Hitachi Zosen booked Rs2.4bn worth of orders in FY20 and has orderbook of Rs4.8bn as of Mar'20. Furthermore, the company is L1 in an FGD order from state.

- Strong ordering pipeline led by government capex: Company is confident of traction in government-related ordering and orders related to FGD, civil infra and refinery in FY21. Around 47% of the current orderbook is from government and they are exploring opportunities in defence, buildings and factories including small airports etc. On FGD front, ISGEC will participate in NTPC Lot 6 FGD tenders; company is witnessing enquiries from Uttar Pradesh, Tamil Nadu and Haryana for the same.

- Sale of Philippines plant delayed due to Covid-19 outbreak: ISGEC will have to spend on retaining the current manpower and ensuring security of the facility. Hence, consolidated margins are likely to get impacted by Rs100mn-120mn per annum. The entity has a debt of US$35mn and pending construction work worth ~US$15mn. The lender has extended repayment terms for two years and the next installment is in Jan'22. ISGEC will have to either complete the pending work with an overseas loan or find a buyer ready to fund the required capex and recover dues worth ~US$38mn.

- Maintain BUY: Due to depressed earnings in FY21E because of lockdown, we value the stock on FY22E earnings with a standalone target P/E multiple of 12x. We value ISGEC Hitachi Zosen at Rs19 (25x FY22E earnings) and Saraswati Sugar Mills at Rs19 (5x FY22E earnings). We maintain our BUY rating on the stock with an unchanged SoTP-based target price of Rs330.

Shares of ISGEC Heavy Engineering Ltd was last trading in BSE at Rs.243 as compared to the previous close of Rs. 240. The total number of shares traded during the day was 46820 in over 822 trades.

The stock hit an intraday high of Rs. 245.45 and intraday low of 239. The net turnover during the day was Rs. 11296165.

Source : Equity Bulls

Keywords